Media trouble, rough seas ahead

Nov 11, 2002  •  Post A Comment

Big media has got a big problem. It must intensely focus on and deal with at least two sea changes-technology-enabled consumer control and pervasive broadband-that are poised to destroy what’s left of the status quo and initiate a profound power shift.
Based on indications of how media companies are cautiously budgeting for more economic unknowns and volatility in 2003, it appears that there’s barely an acknowledgement of such longtime trends that are about to become an industry sea change.
The culprits come in the form of video game networking and the broad adoption of personal video recorders as stand-alone units that are now being incorporated into cable and satellite set-top boxes. But mostly it’s about broadband possibly reaching 20 million homes next year, which many industry experts call an important inflection point. That will be enough critical mass to build businesses that give consumers boundless choices and complete control to order, pause, fast forward and rewind whatever they want, when they want.
Even the always-on interactivity of the Internet hasn’t completely prepared broadcast and cable executives for the radical change that is in store for a medium that built its fortune on by-appointment programming and one-sided selectivity. Enough of the viewers in the United States will have enough control and choice a year from now to know they will never go back to the way it has been and the way television-based media companies are operating even now.
Add to that the formidable new ways consumers can spend their time on the Internet or with devices that give them alternatives to watching TV, and what you have is the makings of a perfect storm that will indiscriminately dismantle television usage and economics as we know them. Based on consumers’ relative ease and speed in embracing the Internet, this change will be dramatically apparent over the next 18 to 24 months. It is already under way.
Dog eat dog
For instance, it was no fluke that overall television usage was down 3 percent at the start of the television season, when broadcast and cable networks launched their new prime-time series. With consumers spending more of their waking hours with other interactive options-led by a 31 percent rise in overall Internet usage from a year ago-there is no question that the traditional titans of television are heavy into shared space that mostly broadcast and cable factions once fought over. While broadcast and cable are cannibalizing themselves and each other, they are being cannibalized by all those new interactive rivals.
And yet, broadcast and cable executives went about their business this fall as if nothing were changing, because they don’t know any other way to do things.
Most media companies, however smart and well intended, think of choice as having broadcast networks and TV stations as well as cable networks to which they can showcase and promote their brands and cater to their core demographics.
Suddenly, their most formidable, rapidly growing rivals are Internet-based services and activities, such as networked video games, streaming media and music downloading. Giving consumers more of the branded broadcast and cable content they already have plenty of on any of these new platforms may not cut it. The point is that traditional media players have made little effort to challenge for this space.
It is a strange place for players such as AOL Time Warner, The Walt Disney Co., Viacom, News Corp., General Electric Co.’s NBC, the new AT&T-Comcast, Cox Communications and all the others to find themselves after years of reaping the benefits of so-called convergence and the synergies of consolidation.
While executing on basic business operations to deliver revenues and profit growth remains job one, many companies are besieged by the need to reduce debt, improve corporate governance and selectively rearrange or swap out the assets they have spent a decade accumulating.
As they welcome advertisers back to the fold this year in a wave of ad sales that are as much driven by pent-up demand as by corporate marketing campaigns that need servicing, broadcast and cable players concede they aren’t entirely sure the robust ad spending is here to stay. The fourth quarter will surely tell us more.
Program costs on rise
They are pursuing viewers by essentially the same means they always have, unable to break out of a vicious programming economics model of diminishing returns. With program costs rising by an average of about 8 percent annually, more modest advertising revenues, growing 5 percent to 6 percent, aren’t going to cover the full load.
Broadcast- and cable-related media companies continue to go through these age-old exercises even as the ground beneath their feet fractures into hundreds of niche pieces. The recent decline in basic subscribers in cable’s mature universe underscores that not even cable-with its high-speed data and digital video alternatives-is safe.
In a fragmented media world, the best and only way they inevitably will be able to compete will be by aggregating their ratings and households into cumulative measurements that are priced differently-not just because of a changing audience but also because of a changing response to conventional TV advertising. When enough U.S. homes become interactive TV viewers who routinely zip past commercials, the medium will lose its allure for some. Indeed, some Madison Avenue experts already are predicting what could be a dramatic movement of ad dollars away from television this decade.
By next year’s upfront media companies long considered the mass-market platform of all time will likely be aggressively packaging and pricing themselves as amalgams of special interests.
With their escalating cost of doing business virtually unchanged and their revenue base threatened, one would expect even big media to run to some higher plane for shelter. But devising alternatives in this environment is not easy. Media companies were never more risk-averse than they are today. And they are on a slippery slope when it comes to content. Either they will have to pay dearly after fierce negotiations for broadband, video-on-demand and streaming media rights to programming and other content they don’t own or they will continue to run headlong into knotty digital intellectual property and copyright issues.
The answers will not come from massive merger-and-acquisition activity, as in the past. The AT&T-Comcast deal, on track to close next week, will likely be followed by News Corp.’s eventual acquisition of Hughes Electronics’ DirecTV. Most of the deals will be a deliberate exchange or purchase of select assets that are compatible with what companies already own.
Simply put, media companies will not be able to buy or sell or consolidate their way to answers this time around. And they will not be able to simply throw money at new products and services masquerading as astute new businesses such as the Internet.
The most radical activities slated include haggling over rebroadcast rights and experimenting with video-on-demand-considered one of the true killer applications of digital cable.
That leaves even the biggest media players and certainly the smallest woefully unprepared for a world in which consumers would rather interact with devices other than their television sets and are willing to pay for niche content and services that cater to their needs and interests.
And what makes it all the more bizarre is how a leading Internet service provider such as AOL is seeking to address its competitive problems by adopting a “daypart” approach to aggregating related content and users that closely mirrors what has been done for decades on TV.
Start from scratch
It sounds as though the only way to change things is to blow up the master plans and start from scratch. If anything, media companies of all sizes need to do some serious brainstorming with each other to better understand the magnitude of their issues and challenges, and to begin to get a grip on solutions. While the off-the-record FourSquare conference in New York this month-sponso
red by The Quadrangle Group, McKinsey & Co. and JPMorgan-adeptly attempted to do just that, there simply isn’t enough free flowing, enlightened dialogue among media players on neutral ground to figure out where they go next with all this.
The most immediate problems lie not so much in steering end-user habits (they are now and forever out of media’s reach), but in rethinking content (which drove the growth of color TV conversion and cable); relationships with primary constituents such as consumers and advertisers; and how interactivity is empowering users and producers against the arbiters of passive TV.
The incremental siphoning of TV audiences by personal video recording, video games, the Internet and other high-tech devices is well under way. The riveting question is what are media’s biggest and smartest companies prepared to do about it?